Too Many Misfires for "Financial Engines"

January 24, 2002

By Dean Foust Editor's Note: In 2001, online finance began to find its footing. True, buffeted by the downturn in stock trading, online brokers struggled. But banks convinced millions of Americans to use the Web to manage their accounts, online mortgage services moved into profitability and closed billions of dollars worth of loans, and even online bill payment began attracting consumers after years of frustration. Over the coming weeks, Clicks & Misses will review several high-profile sites driving this trend. Here's the first:

At the height of the stock-market boom, I -- and probably you -- had visions of parlaying the swelling value of my 401(k) account into a one-way ticket to early retirement. Then the Internet bubble burst, and stocks went into grinding decline. Checking my retirement-plan balances -- ouch! -- I wondered if I'd retire at all. It was high time for a damage assessment. So I decided to run my numbers at one of the many financial-planning services on the Web.

I turned to Financial Engines, available both at FinancialEngines.com and through financial-services companies and company retirement plans that license its software. The company has set out to build a money-making service around the pioneering portfolio-management theories (and considerable reputation) of company co-founder and Nobel-winning economist William F. Sharpe by programming the best, most objective financial advice into software you can access any time.

BASIC OR DELUXE? Financial Engines' help comes in different flavors, depending on how much work you want to do and how much you want to pay. A free, comparatively basic calculator lets you simply assess your chances of meeting your retirement goals.

For $39.95, Financial Engines offers advice -- based on algorithms developed by Sharpe and his team -- on how to rebalance your portfolio, including suggesting mutual funds whose approach match your goals. For an extra fee, you can get an annual subscription that gives you four quarterly updates based on changes in the economy and the markets. For about $300 a year, you can turn the site into a comprehensive planning tool that covers not just retirement but also other goals, like financing your children's education.

The verdict: Financial Engines is an interesting tool, but well short of the be-all and end-all that Sharpe's credentials and the company's nine-figure pot of venture capital might suggest. I found its engine difficult to use -- and concluded that it neglected to ask a surprising number of highly relevant questions.

A LOT OF WORK. First of all, be forewarned: Using Financial Engines well takes some time up front. It required an hour to input all the data the site demands to make its calculations. But this may be unavoidable: This is no quick-and-dirty retirement calculator that gives you a single, allegedly hard-and-fast estimate of how much money you'll have.

Instead, the site runs so-called Monte Carlo simulations that analyze thousands of potential blends of interest rates, inflation, and other factors. The result: You get a probability curve showing the percentage chance that you'll meet your goal. It's a smarter, more realistic approach, but it demands a lot of very specific information to work.

My first pass through Financial Engines gave me a burst of panic at the thought that you could be reading my journalism for many decades to come. That's because the site initially told me I have a mere 17% chance of meeting my goal of retiring on my full income at age 60 (I'm 40 now).

Once I picked myself off the floor, though, I began going through the little mistakes and oversights that made the situation neither as dire, nor the analysis as smart, as I initially thought. The big problem: Financial Engines' first answers were based solely on the savings in my 401(k) plan and my wife's retirement plan from her old jobs. It didn't include potential income from our taxable accounts, any future inheritances (both my parents and my wife's are still living), or equity in our house.

NAGGING DOUBTS. Why? Partly because they didn't ask, and partly because the site is too hard to use. Financial Engines doesn't inquire about inheritances or housing up front -- you can add that later in the game yourself, but you have to work hard to find the places where you can enter the information.

When I finally did, it raised my chances for early retirement to 35% (though, since I have no idea how much cash my dad is sitting on, I had to guess). Sigh. I threw in the towel on retiring early, changed my retirement date to 65, lowered the estimated annual income I'll need in retirement (after all, my mortgage will be paid), and that pushed me over 50%. Still, it looked like I needed to save more.

Even after these adjustments, though, something something still didn't feel right.

Sure enough, after clicking back through several screens, I figured out that Financial Engines hadn't counted the money in my taxable accounts. The reason: When I filled out the initial questionnaire, the service demanded to know exactly how many shares my wife and I owned of each mutual fund -- but I had simply entered the dollar value of our holdings.

OBSCURE BOX. A few screens later, I realized Financial Engines hadn't accepted these numbers -- and hadn't alerted me that it had failed to take them into account. Instead, it simply assumed the value of each mutual fund was zero.

Even when I dug out our statements and entered the precise data, Financial Engines still didn't count the taxable funds. This time, I'd missed checking an obscure box indicating I wanted these accounts counted in my retirement calculations, instead of being reserved for some other challenge, like paying for college.

The program also never asked important lifestyle questions. As much as Financial Engines boasts that it analyzes thousands of economic and market scenarios, it bases its calculations on a family's current income and savings, and never really incorporates how income is likely to change.

FUTURE SCENARIOS. In my case, it overlooked a remarkably basic question: When will my wife, Lisa, out of the work force for seven years now, resume her career? She'll likely be home with our young children for a few more years, then ease back into the work world part-time before going full-time again. But Financial Engines didn't initially take into account that while her income is now zero, in a few years it could be substantial again.

Financial Engines also didn't ask about likely changes in our savings rate in years to come. In calculating our Social Security situation, it didn't ask how many years Lisa worked before she quit, how much she earned, or whether she'll work again. So I suspect the program's projection of her Social Security payout is probably too low.

Nor did the site ask about future changes in my 401(k) contribution rate, which I've nudged down to free cash while my wife isn't working. But I'll return to the maximum in a year or two. As with the taxable accounts, I went back and had to find a way to enter information about Lisa's future income -- and again the program initially ignored the data.

NEGLECTED SPOUSE. And again, it was up to me to figure out why: Financial Engines assumed we would spend her money. In fact, since we can live on my salary, we plan to save almost all of hers. But the program wouldn't let me assume that, because if we do save all her money we'll exceed the maximum contribution to a 401(k).

If there was a way to tell the software we plan to max out our tax-free retirement contributions then dump the rest into a taxable account, I couldn't easily find it. Instead, I simply concluded that we're in O.K. shape and logged off. Happily, my situation is much better than Financial Engines made it out to be -- because of the answers to all the questions that it forgot to ask.

It turns out that even a sophisticated planning site works best if your situation is simple. If you and your spouse both work, are saving steadily, and don't expect any major life changes, it's fine. But if you're young enough that life and retirement are still more a journey than a destination, you may find that the Web-based planners like Financial Engines don't have all the answers. As to how long you'll have Dean Foust to kick around, we'll just have to see. Foust covers finance from BusinessWeek's Atlanta bureau